BEATING THE ODDS

Beating the Odds

Preserving wealth is much harder than most individuals with measurable assets would believe. The fact is, fewer than 15% of all families maintain their wealth over two decades or more. That means, over 85% of all families with any wealth see their assets substantially eroded.

Don’t buy these findings? Read on.

In our newsletter today, we point out a few of the material risks to asset preservation.

Easy come, easy go

A few of the items at the top of the list to eradicate wealth are spending habits, taxes, liability, currency risks and government actions. When individuals acknowledge their risks and conscientiously manage them, they have a much better chance of preserving their wealth for future generations. The issues faced by families with measurable assets are universal at all wealth levels, and apply equally all across the globe.

Will your assets last beyond one generation?

In a recent study, titled Beating the Odds, it confirmed what most long time estate planners already knew: that assets disappear much quicker than they are acquired.

The study revealed that from the original 1982 Forbes 400 Wealthiest in America, only 54 families from the original list continue to retain that wealth today. This means that only 15% of the original number, just 21 years later, still had the wealth they or their families had worked hard to accumulate. And this 15% figure, according to the 2012 JP Morgan study, is representative of all wealth creators, at all asset levels, everywhere. The findings have universal application.

While it takes extraordinary energy to create wealth, it takes an equally coordinated effort to preserve the assets. The reality is that even if you retain or increase your asset level after two decades, you are beating the odds. And then, most assets and estates that are left to heirs, are generally squandered away quickly by the next generation. Very rarely do assets reach a third generation.

Integrating estate planning and asset protection is a first line of defense. For over thirty years we have gone to great lengths to assist individuals - numbering in the thousands - to preserve their assets from many different types of risks. Those that took steps in advance of problems or threats, walked away in far superior positions than those that hadn’t.

According to behavioral phychologists, human tendency is to attribute positive outcomes to skill, while attributing negative outcomes to bad luck. This factor is rarely factored into our daily activities or financial transactions, and this limits our ability to fully grasp the true element of risk associated with acquiring, and then keeping assets.

According to the behavioral phychologists, risks are often attributed to our self perception of who we are, our professional and recreational pursuits, and where we live. As our self perceptions become altered as we age, business and leisurely activities change, and new political and social environments are thrust upon us, our risks are increasingly unpredictable. In fact, risks often change as quickly as new events arrive on the scene. The key to minimizing risk is to manage the associated risk factors as best we can.

Unfortunately, the study reveals, most individuals think that the odds are in their favor. They believe they possess above-average skills. Many often believe they can maintain control over random events, even when it defies all odds. And they are only kidding themselves.

While these traits are useful for entrepreneurs and wealth creators, they can be devastating to preserving assets once accumulated. And worse yet, most individuals tend to remain anchored in their past successes, which prevents them from reaching a more risk adverse level to protect their assets.

The simple fact – according to the study - is that there is an 85% chance your asset level will become substantially denigrated. If you believe that you can beat the odds of only a 15% probability of keeping your assets intact, consider a few of the risks.

The risk of spending too much

Not surprisingly, high on the list of risks is spending too much money. Sounds simple, but it’s hard to stop spending once you’re in the habit. The key is that your spending habits should be a percentage of your investable assets, and not an absolute dollar amount.

Spending has such a powerful impact on wealth, in part, because it’s hard to reduce spending in absolute terms. If the value of your investable assets declines but you spend the same absolute amount, then consumption as a percentage of assets increases. The increased percentage will then accelerate the depletion of assets. And while some individuals hope that their investment skills will save them from their bad spending habits, the reality is that it will not.

The important fact to remember is that each year you should calculate the level of your current spending and future commitments as a percentage of your financial assets. One year of excessive spending is generally not a problem. But repeating an excessive spending level will, over time, inevitably expose you and your family to a material risk.

The risk of paying too much taxes

Tax on wealth comes in a variety of forms. The typical risk being income taxes, capital gains taxes, and taxes when you die.

In the US, the federal estate tax exemption plummets on January 1, 2013 from $5 million to $1 million, and the estate tax rate increases from 35% to 55%. Many estates are ill-prepared for these changes, and families will be left behind with huge estate tax obligations. This is a material risk.

There are a variety of estate tax planning techniques that allow you to save your spouse, family and heirs from huge amounts of estate taxes. But it’s important these strategies are properly and timely implemented since many current wills and trusts will become outdated effective December 31 this year.

For over two decades our firm has implemented the same or similar grantor trust strategies under IRC 671-678 (the same as Romney's trust) as part of the international trust planning we implement for our clients. To learn more about international trusts, follow this link.

Beyond the basic estate tax planning strategies, view tax shelters with skepticism. Depending on the strategy, there are tradeoffs. And it’s important to keep strategies current. What worked several years ago could be obsolete today. Worse yet, outdated or overly aggressive tax strategies can incur the wrath of tax authorities.

And when individuals and their assets cross borders, a complexity is added that needs to be addressed. However, with this complexity comes with it effective planning strategy opportunities. The use of companies and international trusts, when properly managed and funded, are excellent planning tools for both domestic and international tax planning.

The risk of litigation

While Americans may admire those with money, they just don’t like them very much. In fact, most Americans believe those with money are greedy, dishonest, and pay too little taxes, says Bloomberg. This makes those with any measurable amount of assets a target for litigation.

In our increasingly litigious world, you are vulnerable to more and greater risks of being sued. These risks include employee and director lawsuits, discrimination, malpractice, insider trading, business and professional negligence, and breach of contracts, to name just a few. Whether the litigation is justified or not, simply owning assets is often enough to make you a target.

Liability and umbrella insurance have a place in risk management, but do not rely upon these options for full protection. Expanded coverage can be expensive. Inexpensive policies are no bargains. Claims can be denied. Covered amounts can be well below judgment awards. And insurance companies can and do go bankrupt. At best, insurance can act as a bone to throw a plaintiff’s lawyer, as there are far better asset protection planning strategies available.

An aggressive integrated asset protection structure prepared when you are not presented with litigation, is a small price to pay for peace of mind that your assets have the best possible protection. Protecting assets against litigation is not a once-size-fits-all strategy, and should be designed to fit your needs and accomplish future objectives.

As a former judge and named Top 100 Trial Lawyer, I’ve personally seen assets change hands quickly. Those individuals that took steps well in advance of a litigation risk certainly fared much better than those that didn’t. For a few asset protection planning tips, follow this link.

The risk of currencies

As long as the monetary and fiscal policies at home provide stability, individuals need not expose themselves to currency risk. And when there is fiscal and monetary stability at home, individuals need only a small portion of their portfolio in foreign currencies for investment diversification.

However, some individuals define their wealth in international terms because the majority of their interests lie abroad. Some families live part time overseas. These individuals must establish cash reserves in multiple currencies since their wealth is broader than their home currency alone.

One currency risk is when assets and liabilities are based in different currencies. The fluctuation of currencies can give rise to increasing liabilities against decreasing assets. Or inflation can erode asset values by different economic factors within different countries utilizing different currencies. And rising, devaluating, pegging, or removing currencies pegs, can devastate currency values.

An important question asks which one, or more, currencies can help minimize or reduce risks? Or what currency strategies can be used now to reduce currency fluctuation risks for the future?

The risk the government will get your assets

Another important risk is related to steps or actions – or inactions – that governments can and do take that can significantly affect your assets.

Changes to tax rates, new taxes, fiscal and monetary policies changes, and exchange and currency controls, have frequently taken individuals by surprise. Government ideology shifts can be abrupt when a new government comes to power. Assets that can’t be moved easily from one jurisdiction to another become easy targets for a government desperate for more tax revenues.

The best defense to is diversify assets between different jurisdictions. The more the better. Intangible assets such as intellectual property rights can easily be placed into a company or trust established offshore. The goal is to limit the physical concentration of assets in one jurisdiction exposed to only one government.

And how does an individual attempting to maintaining personal sovereignty – and dignity - plan around risks from all directions?

Planning strategies for the sovereign individual

While governments look to empty your pockets, they continue to increase restrictions to the free movement of individuals and their money. Third party liability threats lurk around every corner. With risks to your assets seemingly coming from all directions, it can be a real challenge today trying to find individual sovereignty, let alone maintain financial independence.

Yet for some, the dream of freedom from government burdens, excessive taxes, and infringements on personal independence and privacy, is a living reality, free of unwanted intrusions. Forward thinking individuals have discovered how to live their life without becoming beholden to any one government or master. How to maintain privacy, legally reduce or eliminate taxes, travel and live freely, and free of excessive government rules and regulations, are some of what they've discovered.

Our next two newsletters, titled The Sovereign Individual, Part I and Part II, reflect planning strategies for sovereign individuals. This two part newsletter contains small snippets from the newly released Offshore Living & Investing, 2nd edition, Planning Strategies for the Sovereign Individual.

So watch this space.

Mitigating risks with international planning strategies

Implementing international planning strategies has been a significant part of my practice for over two decades. I've had the distinct privilege of working with many good, honest individuals that have spent a lifetime of creating financial independence. While needs and objectives are different, what they all have in common is the good, forwarding thinking common sense to plan ahead to guard against risks we know, and risks we don’t know exist.

To steal a quote about risk from the recent pages of history:

“There are known knowns; there are things we know that we know.
There are known unknowns; that is to say there are things that, we now know we don't know. But there are also unknown unknowns – there are things we do not know, we don't know.” (our thanks to former US Secretary of Defense Donald Rumsfeld)

In simple terms, it is the risks we do not know, that we don’t know, that make the probability of maintaining assets long term no greater than 15%. For that reason, integrated international planning – asset protection integrated with estate planning and other objectives - to minimize risks, makes good sense.

(Licensed to Practice Law in U.S. States & Federal Courts; Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; & Assoc. Member Queensland Law Society, AU - Foreign Lawyer)

The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.

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